Thursday, May 21, 2009

Is Australia's Treasury independent?

Of course not

Here's how it is, as I have been describing it for years:

(The full version of this post also has my transcription of Ken Henry's answer to the question at Tuesday's post-Budget Q&A)

The job of the Treasury is to advise the Government in accordance with Treasury's own assessment of conditions and what is needed. If the government is wise, it will listen, and then make its own decision. It is then up to the Treasury to impliment that that decision.

We elect governments to govern - the Treasury (as with all departments) merely helps them.

Simple? Simple.

Once upon a time Malcolm Fraser wasn't happy with the quality and range of advice he was getting from the Treasury.  Here's what he did.

Clicking on the link below will give you what Dr Henry said:

"In response to your first question, is the Treasury independent?

In a sense 'no' and in a sense 'yes'.

So, let me answer this.

Strictly of course we're not. The Treasury department is a department of state. It is part of the executive government. it works to the government of the day, whatever the political persuasion of the editor of the day.

And os in that sense of course the Treasury is not independent of government and it can never behave as if it is.

But there is another sense in which it does have independence and that is that the Treasury conducts its analysis without government interference. It is up to the government of the day to decide whether to accept that aqnalysis or to reject that analysis.

Over the years in which I have been in the department the general practice has been that government's have accepted the analysis, particularly economic forecasts. But it hasn't always been the case.

And with respect to the policy advice that the institution provides - well we would like to think that governments always follow our policy advice, but as ever person in this room would know that's not always the case either.

So in that sense we are independent - the sense in which we are left to craft our own analysis and our own policy advice. But we are not independent in the sense that at the end of the day it is the government that decides what the policy position should be. It's also technically the government that decides what numbers should go into the public domain."

UPDATE: Robert Carling in The Australian.
THE Treasury's independence has featured in the post-budget commentary. As a former commonwealth and state treasury official I find this surprising, because I can recall very few moments of independence in 27 years. I suspect that this generation of treasury officials across the country has even less reason to feel independent.

Claiming independence for the Treasury, as the Prime Minister did in a post-budget television interview, is a way of ducking government accountability, even though a glance at the budget papers shows that they are "circulated by the Treasurer and the Minister for Finance for the information of honourable members".

The reality is that the Treasury is a department of state whose constitutional role is to give policy advice to the government, implement policy decisions of the government, and administer certain pieces of legislation.

It has statutory obligations that cannot be overridden by ministerial command, but in any other sense it is not independent. It is not a think tank or a university. It is not even like the Reserve Bank, which does have independence in monetary policy and issues its own forecasts.

So, independent is the wrong word, but stopping the story there would be selling the Treasury seriously short.

The nature of its responsibilities and the talent and motivation of its staff are such that as an institution it can contribute enormously to the rigour of public policy, provided it is allowed to do what it does best without political second-guessing.

It can be a protector of the public interest and a bastion of fiscal discipline and credibility when there are precious few others to serve in those essential roles. This is what a former secretary to the Treasury meant when he often described his department as a "national treasure".

But it can only be a national treasure if the government of the day allows it to be. It is up to the Government how much free rein Treasury is given to do and present its technical work and participate in the public debate on matters within its domain.

Any government can trash the national treasure by demanding fudged figures and turning the Treasury into just another spruiker for government policy. That is a power any government would abuse at great damage to its own credibility and that of the nation's fiscal policy. A government would be insane to abandon the self-discipline of a Treasury kept a safe distance from political interference.

Insanity has not yet taken over, but over many years there has been a gradual weakening of the dividing line between the political work of the government and the technical work of the Treasury.

Even the budget speech was once written by senior Treasury officials. The result was long, eloquent, credible and boring. Now it is just theatrical and boring. And the language of the spruiker now infects the budget papers, like a virus that has mutated from the budget speech.

We are told in statement 3 that "the Government has been prepared to make the hard decisions now in order to position Australia for the future". Really? One wonders how such a statement got there.

We are also reassured that "there is scope for tax receipts to recover, while maintaining our commitment to keep taxation as a share of GDP below the 2007-08 level".

If those words were penned in the Treasury, the author presumably did not feel independent.

Then there is the voluminous ex-post rationalisation of the fiscal stimulus packages, which contributes to the extraordinarily defensive tone of the budget papers. The budget papers are devalued by this sprinkling of politically inspired bulldust.

Economic forecasting is technical work, and revenue and expenditure estimation (for a given set of policies) even more so. The Treasury and others involved must be allowed to do their best technical work without political second-guessing, not because they know all but because they know more and because this work has to be kept beyond political temptation.

Interference need not be anything as crass as an instruction to substitute one number for another. I never experienced anything of that kind. It can take more subtle forms, such as microscopic political scrutiny and questioning of the forecasts and estimates, which can lead public servants subconsciously to anticipate the politicians' views in the judgmental overlay that has to go with any technical work.

There is no reason to think that the economic and revenue forecasts in the latest budget are anything other than Treasury's best guesses.

For all that has been said, they look plausible. But the more the Government feels it necessary to make false claims about the Treasury's independence, and the more the Treasury is drawn into the political process, the more it seems we really do need a new and truly independent fiscal authority to put the budget basics beyond political temptation.

Robert Carling is a senior fellow at the Centre for Independent Studies.